Monday, 5 November 2012

zen habits: How to Make Health Insurance a Bad Bet

I’m a self-employed business owner, which means I need to buy my own health insurance — and even a high-deductible plan would end up costing me thousands of dollars a year for my family, which is a waste since my family uses almost zero medical services.

And that’s the rub: for people who are healthy and who must pay for their own insurance, health insurance is a bad bet.

That’s according to my friend Tynan, a former professional gambler. If you’re healthy, your odds of using more than your high deductible in medical services (say, a $10,000 deductible) are very low. You are highly unlikely to ever use that insurance. And so you are, in effect, throwing your money away on a bad bet that you might someday use it, even if that’s an unlikely event.

Now, don’t get me wrong: for many people, health insurance is a good bet. If you have health problems, or have a condition (obesity, tobacco use, etc.) that is likely to lead you to health problems, you should definitely have insurance. If your employer pays for 80% of it, then health insurance is probably a good option no matter what.

But if you pay for your own insurance, and you do the things that lower your odds of using expensive medical insurance (more than a broken leg or a routine doctor’s visit), then it’s a bad bet.

So here are the two questions to answer in this post:

How bad a bet is it?

How do you lower your odds of needing insurance, so that it becomes a bad bet?

And what do I do if I ever lose that costly bet, and need a ton of health services?

Let’s answer these questions one at a time.

Just the summary: This is a really long post, but you can skip to the conclusion at the bottom if you just care about the actionable steps.

How Bad a Bet is Insurance?

The chances of most people dying of a heart attack are about 1 in 5. But for me, because of my diet, exercise, age, blood pressure and cholesterol levels, etc. … it’s less than 1 in 100. Think about that: if you bet on a roulette table with 1 in 5 odds, you might actually make that bet. But you’d be a sucker to bet on a 1 in 100 odds bet.

That’s for dying of heart attack, not being hospitalized for one, and there are plenty of other ways to be hospitalized. But it is an illustration of how being healthy dramatically changes the odds.

Heart Attack including Cardiac Revascularization (Angioplasty with or without Stent) $72,000

Coronary Artery Disease $75,000

Neonate (premature baby) with extreme problems $101,000

End-Stage Renal Disease $173,000

Respiratory Failure on Ventilator $314,000

I can cross out HIV (no shared needles or unsafe sex), hemophilia (a genetic disorder), and a premature baby (Eva & I are done with babies). Heart attack and coronary artery disease are pretty much the same thing. End-stage renal disease is from kidney failure, usually from Diabetes Mellitus or long-term, uncontrolled hypertension (high blood pressure). Respiratory failure on ventilator is what happens after a long bout in the hospital with a serious illness, but it could be a variety of serious diseases.

Transplants are usually kidney or liver. Liver failure can be from many things, including long-term heavy alcohol use, viruses spread through unsafe sex and sharing drug needles, or other conditions such as diabetes, heart disease or obesity. Kidney failure is pretty much the same as end-stage renal disease, so again, diabetes and uncontrolled hypertension.

To figure out what your odds of getting these conditions is almost impossible, I’ve found. There just doesn’t seem to be any chart that will tell you your odds of getting a condition depending on what risk factors you have. But you can reduce or eliminate risk factors — stop smoking, eat healthier, exercise, don’t drink too much — and your odds of getting a condition goes way down.

The heart attack illustrates this — dropping risk factors such as cholesterol, blood pressure, weight, age, smoking reduced my odds from 1 in 5 to less than 1 in 100. That’s a dramatic difference in odds.

The same thing happens for other cases — if you don’t drive, for example, your odds of getting killed in an accident drops from 1 in 100 to about 1 in 700 for a pedestrian accident. If you smoke, your odds are 15-30 times greater of getting lung cancer or dying from lung cancer than if you don’t smoke, and actually smoking increases your odds of most cancers and major diseases such as heart disease and stroke. If you don’t smoke, don’t have high blood pressure, aren’t overweight, and eat healthy and exercise, your odds of getting a stroke go way down.

So the odds aren’t really something we can calculate with certainty, but we do know that by eliminating the major risk factors, our odds go down by a factor of 7-30 or so. Instead of having a 20% chance, we have a 1% chance or less (by best estimation).

That’s a bad bet. It’s not a good idea to bet on something that has less than 1% chance of happening, especially to bet thousands of dollars on it. You can bet a few dollars on the lottery that you’re willing to throw away (better not to, but OK), but why would you throw away thousands of dollars on this low-odds bet?

The only reason: fear. You’re afraid of the worst happening (even if it’s very unlikely), so you take the safe (but bad) bet. We’ll talk about how to address this fear below.

My family has used almost zero dollars in medical care in the last 5 years, since we started becoming healthy. We used to use a lot in doctor’s visits, emergency room visits, asthma breathing machine treatments, medicine, and more. That’s all gone. Now we just need vaccinations and some minor check-ups to make sure everything’s OK.

What you’re really throwing away: For my family, a high-deductible insurance policy can cost $4,000-5,000 a year (about $350-400 a month). For a smaller family, it would be less. A lower-deductible insurance policy costs a lot more. Assuming a monthly payment of $380 and an annual return rate of 8%, if you invest that instead of spend it on insurance, you’d have $250,000 in 20 years. More, if you adjust the payments upward for inflation. That’s a big amount to gamble on something where you have less than 1% chance of using.

Note on Obamacare mandate: The worst part of Obamacare (which I’m generally in favor of) for me is the individual mandate to have health insurance coverage. If you don’t (starting in 2014), you could pay something like $2,500 in fines for a family like mine. That forces me either to take this bad bet, or take a penalty for being healthy. I understand why this might arguably be a good policy for the nation in general, but for me it’s horrible. I’m thinking of forming my own super-healthy insurance cooperative by 2014.

How to Lower Your Odds of Needing Insurance

If we take a look at the major conditions that lead to expensive health care, above, we can take a look at the controllable risk factors, and then eliminate them. Note that there are risk factors out of our control — mostly genetics and race.

So first, let’s take a look at the Causes & Risk Factors, from the Center for Disease Control … note that for many conditions, there are other conditions that are risk factors — diabetes, cholesterol and high blood pressure are risk factors for heart disease and heart attack, for example. So we have to take a look at the risk factors for those conditions as well, and those are listed here:

Summary – non-condition risk factors: These are the risk factors that we can control:

tobacco use

being overweight/obese

physical inactivity

diet high in saturated fat & cholesterol

diet high in sodium

too much alcohol

too much exposure to sun

unprotected sex/sharing needles

driving safely or at all

So how do you lower your odds? By eliminating the risk factors that you can control. We’ll talk about that in the conclusion.

There are a couple long-term care conditions, such as Alzheimers, dementia, and frailty, that aren’t mentioned here. We’ll address those separately in the conclusion as well.

Does dramatically lowering your odds mean you’ll never get sick or injured? No, of course not. Even if you did everything perfectly, you could still get hospitalized. People who seem perfectly healthy from doing all these things get heart attacks — they just get them far less often.

And yes, eventually you’ll get something. As you get into your 50s, your odds go up, and into your 60s, they go up a lot. Most people who have heart attacks or cancer are in their 60s or older. Same thing for frailty, Alzheimers, hip fractures, etc. As you get older, it gets very likely you’ll need expensive health insurance. But I’m 39, and my family is younger than that, so we’re not in serious danger at the moment.

Fear & the Worst-Case Scenario

So if we can dramatically lower our odds by eliminating the main risk factors, why would anyone get health insurance? If you’re perfectly healthy and likely to stay that way for awhile, then the answer is simple: fear.

Fear is the motivator for insurance. And it’s not a rational motivation. What’s a more rational approach? Well, what if we looked at this unlikely worst-case scenario, and thought of other possibilities?

I could raise funds by creating a powerful product and asking all of you for help. I don’t like asking for help, but it’s not likely I’ll have to do this.

I could sell Zen Habits. I wouldn’t like to do that, as I truly love this blog and its wonderful readers, but honestly, there is almost nothing in this world that I couldn’t let go of if I had to.

I could go broke, and start again anew. I’ve done it before, and it’s not that bad. My family wouldn’t really suffer, as we always have other family and friends to stay with temporarily if we really needed it.

These aren’t the best, but they’re also not life-and-death. When you take the irrationality out of the decision-making process, you can see that the worst isn’t that horrible. And the worst is very unlikely.

There is the case of needing medical care that might cost a few hundred dollars, or even a few thousand dollars — if you don’t have insurance, what do you do? Well, we self-insure — meaning, we just pay for these expenses. We don’t have a lot of them at all (basically nothing in the last five years), but we have saved a lot of money from not having insurance, so we put that in the bank (and invest it). This kind of savings/investment plan is important, because if you just use the money you would have spent on health insurance on shopping or other kinds of expenses, then you’ll have nothing saved up for when you need to go to the doctor.

So what if you get into a bad accident or get some unexpected disease? Isn’t this invitation for bankruptcy? Well, how often has this happened to you? In my 39 years, it’s never happened, and most people I know haven’t faced this either. Again, let’s use rational arguments instead of fear.

Conclusion: Ways to Lower Risks

So, for those who skipped to the end, let’s take the controllable risk factors, and eliminate them by doing these steps (please note that this isn’t medical advice, as I’m just a writer not a doctor, but it’s based on research from the CDC, Mayo Clinic, American Cancer Society and others):

Have regular screenings for cancer, blood cholesterol and blood pressure

Our family does all of these things, and so for us, health insurance is a bad bet. And aside from the insurance question, we enjoy a healthy life and love feeling good, being active, eating delicious plant food, and walking instead of driving.

Eva & I enjoy 1-2 glasses of red wine at night, though the kids weirdly don’t have a taste for it. I guess some things are just inexplicable.

In addition: You should also build up savings/investment of at least a few thousand, and much more if you can, for unexpected medical needs. And finally, figure out a rational worst-case scenario plan.

Simple Fitness Habit

If you need help with the eating and fitness habits, as I noted last week, I’m launching a new course with a group of great experts called Simple Fitness Habit. It should be out mid-week — I’ll let you know!